What Shareholder Suits Over the Fox Sex Harassment Scandal Might Look Like

The securities litigation bar is already lining up clients.

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Security stands in front of Roger Ailes as he leaves the News Corp. building on July 19, 2016, in New York City.

Photographer: Drew Angerer/Getty Images

The Fox News-Roger Ailes sexual harassment scandal has created plenty of headaches for parent company 21st Century Fox. Here’s another one: potential shareholder litigation. At least three plaintiffs law firms are looking at possible suits alleging harm to investors.

There are two basic approaches such suits could take, according to Daniel Sommers, a partner with Washington, D.C.-based Cohen Milstein, one of the firms considering taking legal action. The more obvious and promising strategy would be to sue 21st Century Fox on a theory that its officers and directors breached their “fiduciary duty” to the company and its shareholders, he said. Such an alleged breach would have happened, the argument goes, if they failed to step in much earlier to prevent the sexually tinged misbehavior that’s been attributed in court papers to Ailes.

An action of this sort, known as a shareholder derivative suit, would allege that officers and directors “had to have been aware of [Ailes’s] behavior, and that behavior has led to lawsuits, related costs, and collateral damage to the corporation,” Sommers said. If successful, derivative suits usually end with changes in corporate governance rules, or even an award paid back to the company—not shareholders. The lawyers, however, generally get paid.

Rupert Murdoch, co-chairman of 21st Century Fox.
Rupert Murdoch, co-chairman of 21st Century Fox.
Photographer: Drew Angerer/Bloomberg

A second plaintiffs law firm, Scott + Scott LLC,  based in Colchester, Conn., issued a press release on Sept. 7 inviting investors to get in touch if they were interested in a potential suit alleging that “Fox’s officers and directors have breached their fiduciary duties owed to Fox and its shareholders.” Michael Burnett, a lawyer with Scott + Scott, didn’t return messages seeking more details on the firm’s plans. But the press release, a standard prelude to securities litigation by plaintiff’s law firms, indicated Scott + Scott's thinking: The firm cited a New York Times article quoting corporate governance and ethics experts who said, in the Times's words, that Fox and its board “ought to have been aware of problems involving sexual harassment accusations at the network, as well as any payouts related to them.”

A 21st Century Fox spokesman, Nathaniel Brown, declined to comment for this article. The company agreed earlier this month to pay Gretchen Carlson, a former news anchor, $20 million to settle her lawsuit against Ailes, the Republican strategist who built Fox News into the most-watched cable network. The parent company also issued an unusual apology acknowledging that Carlson “was not treated with the respect and dignity that she and all of our colleagues deserve.” Fox has also agreed to settlements with other women, Bloomberg News has reported. And a similar sex-harassment suit brought by ex-Fox News host Andrea Tantaros against the network and Ailes is ongoing. Ailes, who was ousted on July 21, has denied any wrongdoing.

One potential defense 21st Century Fox might offer to any shareholder suit is that, in a vast media corporation with more than $22 billion in annual expenses, officers and directors could not have been expected to be aware of a handful of sex-harassment settlements—at least not until the Carlson pact made headlines. For example, former Fox News employee Laurie Luhn reportedly received a $3.15 million settlement from the company in 2011 after making sex-harassment complaints against Ailes. 21st Century Fox has said that the parent company of Fox News at that time, News Corp., was unaware of the Luhn settlement because of its relatively small size.

A second approach to a shareholder lawsuit would focus on 21st Century Fox’s share price and argue that investors wouldn’t have lost money on the stock if the company had properly disclosed the difficulties it was having with sexual harassment. The firm, Goldberg Law in Los Angeles, is looking for potential plaintiffs for such a securities-fraud suit, a Sept. 2 press release indicated. The release invited investors to get in touch “if you purchased or otherwise acquired shares of Fox in 2013 or before.” Brian Schall, a lawyer with the firm, declined to comment other than to say that the “investigation” of a potential suit against Fox is continuing. 

It’s not clear which period of time the Goldberg firm views as relevant for a potential securities-fraud case. Fox stock traded as high as about $35 a share in 2013, rose to more than $39 in late 2014 and closed on Wednesday at $23.70—roughly a 39 percent drop from the 2014 high and a 33 percent fall from the 2013 figure.

--With assistance from Ben Steverman.

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